To help address issues identified by entities as they implement the new guidance, the FASB and IASB established the Joint Transition Resource Group (TRG). Constituents submit issues to the TRG for discussion and to the extent the TRG discussions on an issue lead the FASB and (or) IASB to believe additional standard setting is necessary, they add the issue to their respective agendas. The TRG has met several times since the new guidance was issued. Summaries of these meetings can be found on the FASB’s website. These summaries provide information related to both those issues the TRG does not think require additional standard setting as well as those issues the TRG believes may require additional standard setting by the FASB and IASB.

The FASB and IASB have added projects to their agendas to address several of the TRG issues. While there are some issues where the FASB and IASB have moved in lockstep, there are also several issues where that has not been the case. For many issues discussed by the TRG, as well as other issues, the FASB has decided to undertake additional standard setting (e.g., provide clarifications or additional guidance), while the IASB has decided not to do so. In addition, while the FASB held TRG meetings in 2016, the IASB did not, and also does not plan to schedule or hold any further meetings. As of August 11, 2017, the FASB has not held or scheduled any TRG meetings in 2017.

The issues discussed thus far by the FASB related to implementation of the new guidance include the following:

The table below provides information about each of these issues, including the decisions reached by the FASB and their overall status. In addition, the table below provides information about an announcement made by the Securities and Exchange Commission (SEC) Observer at the Emerging Issues Task Force (EITF) meeting held on July 20, 2017, the subject of which was an optional effective date deferral for certain public business entities.

Issue and decisions reached

Additional resources

Status

Scope: Insurance contracts

The FASB clarified that all contracts within the scope of Topic 944, Financial Services—Insurance, in the Accounting Standards Codification (ASC) should be excluded from the scope of Topic 606 and not just insurance contracts within the scope of Topic 944.

The FASB clarified that certain fixed-odds wagering contracts entered into by a casino or another entity with casino operations are excluded from the scope of ASC Subtopic 815-10, Derivatives and Hedging – Overall. In doing so, the FASB added a specific statement to the scope section of Subtopic 815-10 indicating that such contracts should be accounted for in accordance with Topic 606. In addition, the FASB added the new ASC Subtopic 924-815, Entertainment—Casinos – Derivatives and Hedging, which also indicates that fixed-odds wagering contracts entered into by a casino are excluded from the scope of Topic 815 and instead accounted for in accordance with Topic 606. Subtopic 924-815 also explains the nature of fixed-odds wagering contracts.

The FASB clarified that the guidance in ASC Subtopic 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets, applies to transfers (i.e., sales) of nonfinancial assets and in substance nonfinancial assets to counterparties other than customers. However, certain transfers of nonfinancial (and in substance nonfinancial) assets to counterparties other than customers are excluded from the scope of Subtopic 610-20, including, for example, sales of subsidiaries or groups of assets that meet the definition of a business used in ASC Topic 805, Business Combinations, sale-leaseback transactions, conveyances of oil and gas mineral rights and nonmonetary transactions.

The FASB also made changes to Subtopic 610-20 that require an entity to apply certain guidance in ASC Topic 810, Consolidation, and Topic 606 when accounting for the transfer of nonfinancial (and in substance nonfinancial) assets within its scope. The guidance in Topic 810 is applied first to determine whether the entity retains a controlling financial interest in the transferred nonfinancial (and in substance nonfinancial) assets. If the entity retains a controlling financial interest in the transferred nonfinancial (and in substance nonfinancial) assets, those assets are not derecognized and a gain or loss is not recognized. Instead, the effects of the transfer are accounted for in equity similar to the accounting for other transactions in which the parent’s controlling financial interest in a subsidiary decreases, but remains a controlling financial interest (i.e., transactions in which the parent does not lose its controlling financial interest in a subsidiary). If the entity does not retain a controlling financial interest in the transferred nonfinancial (and in substance nonfinancial) assets, it applies much (but not all) of the guidance in Topic 606 to account for the transfer. Additional guidance is provided in Subtopic 610-20 to address issues that may arise in the accounting for a transfer of nonfinancial (and in substance nonfinancial assets) within its scope, such as how any liabilities assumed or relieved by the counterparty in the transfer should be reflected in the accounting for the transfer.

Subtopic 610-20 is effective at the same time as Topic 606. Upon its initial application of Subtopic 610-20, an entity may apply the same transition method used in adopting Topic 606 or the other available transition method. In addition, an entity may elect different practical expedients in its adoption of Subtopic 610-20 than it elects in its adoption of Topic 606.

Refer to Section 4.3 of the RSM white paper, Revenue recognition: A whole new world, for additional information about the scope of and accounting for transfers of nonfinancial (and in substance nonfinancial) assets.

The FASB clarified that guarantee fees within the scope of ASC Topic 460, Guarantees, (other than those related to warranties) are not within the scope of Topic 606. In addition, the FASB noted that if the guarantee is a derivative, it should be accounted for under Topic 815.

The FASB clarified that for purposes of applying Topic 606 to service concession arrangements that fall within the scope of ASC 853, Service Concession Arrangements, the customer of the operation services provided under the arrangement is the grantor.

Scope: Determining whether a grant (or similar contract) is a contribution or exchange transaction

The FASB has proposed clarifying its guidance on when a transfer of assets from a resource provider (e.g., a government) to a not-for-profit entity should be accounted for as: (a) a contribution received in accordance with the relevant guidance in ASC Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition, or (b) an exchange transaction in accordance with Topic 606. Based on the proposed clarifications, an exchange transaction would be defined as a reciprocal transfer in which what is transferred by each party in the transaction is of approximately commensurate value to what is received by each party in the transaction. In addition, transfers of assets by a resource provider (e.g., government) to a recipient (e.g., hospital) in connection with an existing transaction between the recipient and an identified customer (e.g., patient insured under the Medicare program) would not be contributions and would instead be accounted for in accordance with other applicable guidance (e.g., Topic 606). The FASB’s proposal also includes additional implementation guidance (including several new examples) to help determine: (a) whether a transfer is an exchange transaction or contribution and (b) whether contributions are conditional or unconditional for purposes of applying Subtopic 958-605.

The FASB clarified the objective of the collectibility criterion that must be met (along with several other criteria) before a customer contract is accounted for using the revenue recognition model in Topic 606. As clarified, the objective of the collectibility criterion is to assist in determining whether a substantive contract exists between the entity and the customer. In addition, the FASB clarified that the collectibility criterion is focused on collection of substantially all (and not all) of the consideration to which the entity will be entitled to in exchange for the promised goods or services that will be transferred to the customer (which may not be all of the promised goods or services in the contract). The FASB also added more guidance and examples to better explain and illustrate how the collectibility criterion should be applied.

Step 1: Identify the contract with a customer – Accounting when collectibility is not probable

The FASB added an additional event under which revenue should be recognized when a contract does not meet the necessary criteria to be accounted for in accordance with the revenue recognition model in Topic 606 (one of which relates to determining whether collectibility is probable [see the previous issue in this table]). The additional event occurs when all of the following are true: (a) the consideration received by the entity is nonrefundable, (b) the entity has transferred control of the goods or services to which the nonrefundable consideration relates and (c) the entity has stopped transferring additional goods or services to the customer and is under no obligation to transfer any additional goods or services.

Step 2: Identify the performance obligations in a contract – Identification of promised goods or services

The FASB revised its guidance on identifying promised goods or services to indicate that goods or services that are immaterial in the context of the contract do not have to be identified as promised goods or services for purposes of further evaluation under the rest of the revenue recognition model. This revision does not change the requirements in Topic 606 used to evaluate optional goods or services to determine whether they represent a material right to the customer. In addition, the revisions indicate that the costs related to goods or services that are immaterial in the context of the contract should be accrued when revenue is recognized before all of the promised goods or services are transferred to the customer.

Step 2: Identify the performance obligations in a contract – Treating a series of distinct goods or services as a performance obligation

The FASB revised its guidance to provide an example illustrating whether a series of distinct goods or services should be accounted for as one performance obligation and, if so, how variable consideration related to such a performance obligation should be recognized.

Step 2: Identify the performance obligations in a contract – Separately identifiable from other promises in the contract

A promised good or service must meet two criteria to be considered a performance obligation (i.e., a unit of account), one of which is that it must be separately identifiable from other promises in the contract (i.e., distinct within the context of the contract). The FASB revised its guidance to: (a) clarify the objective of this criterion and (b) align the factors used to determine whether this criterion has been met with the clarified objective. In addition, the FASB revised existing examples and added more examples to better illustrate how the clarified objective and re-aligned factors should be applied.

The FASB revised its guidance to clarify that when restrictions of time, geographical region or use are included in a license of intellectual property (IP), they generally represent attributes of the license and should not affect the identification of a contract’s promised goods or services or the determination as to whether a performance obligation is satisfied over time or at a point in time. The FASB also illustrates in an example when restrictions of time and use do not represent attributes of the license, but instead indicate that more than one promised good or service exists.

The FASB revised its guidance to indicate that shipping and handling activities that occur before the customer obtains control of the promised goods should be considered fulfillment activities and not promised services that have to be evaluated under the rest of the revenue recognition model. In addition, the FASB revised its guidance to allow an entity to make an accounting policy election to treat shipping and handling activities that occur after the customer obtains control of the promised goods as fulfillment activities and not promised services that have to be evaluated under the rest of the revenue recognition model. In addition, the revisions indicate that the costs related to shipping and handling activities should be accrued when revenue is recognized before those activities occur.

The FASB clarified the accounting for noncash consideration to indicate that such consideration should be measured at its fair value at contract inception and should not be adjusted after contract inception for changes in its fair value due to the form of the consideration (e.g., changes in the entity’s stock price). The FASB also clarified that when the amount of noncash consideration varies due to reasons other than the form of the consideration (e.g., it varies as a result of the entity’s performance), that variability should be treated as variable consideration.

The constraint on sales-based and (or) usage-based royalties results in such royalties not being included in the transaction price (and, ultimately, revenue) until the later of: (a) the resolution of the related uncertainty (i.e., sales and (or) usage occur) or (b) the satisfaction of the related performance obligation in whole or in part. The FASB revised its guidance to clarify that this constraint applies when the only, or predominant, item to which the royalty relates is the license of IP and that it should only be applied on an all-or-nothing basis (i.e., it should not be applied to just a part of the royalty stream). The FASB also revised certain examples to illustrate how the constraint should be applied when revenue for the related license of IP is recognized over time.

The FASB added an accounting policy election that allows an entity to exclude sales and similar taxes collected from customers from the transaction price (i.e., the amount ultimately recognized as revenue). If this accounting policy is not elected, the entity must determine whether it is a principal or an agent with respect to the sales or similar tax. If it is a principal, the sales or similar tax is included in the transaction price. If it is an agent, the sales or similar tax is not included in the transaction price.

Step 5: Recognizing revenue when (or as) each performance obligation is satisfied – Determining the nature of the entity’s promise in granting a license

The FASB made significant revisions to its accounting model for licenses. Based on those revisions, whether the license of IP represents the right to access the entity’s IP (in which case revenue is recognized over time) or the right to use the entity’s IP (in which case revenue is recognized at a point in time) depends on whether the IP has significant standalone functionality. If it does not have significant standalone functionality, the IP should be considered symbolic IP (e.g., a trade name), and a license for symbolic IP is considered a right to access the IP. If it does have significant standalone functionality (e.g., software), it should be considered functional IP. A license for functional IP is considered a right to use the IP, unless certain narrowly-focused criteria are met. The FASB revised existing examples and added more examples to illustrate how its revised accounting model for licenses should be applied. The FASB also added guidance to indicate that the nature of the license (right to use vs. right to access) should be taken into consideration in determining how and when to recognize revenue for a single performance obligation consisting of a license and other promised goods or services (because the license and other promised goods or services did not meet the criteria to be considered separate performance obligations).

Step 5: Recognizing revenue when (or as) each performance obligation is satisfied – Timing of recognizing revenue from a license of IP

The FASB revised its guidance to indicate that revenue from a license of IP cannot be recognized before both of the following occur: (a) the entity provides the customer with a copy of the IP or otherwise makes the IP available to the customer and (b) the beginning of the license period (which, when the license is being renewed, means the beginning of the renewal period).

The FASB proposed: (a) eliminating the specific guidance on how to account for preproduction costs related to long-term supply contracts (the preproduction costs guidance) from the ASC and (b) requiring such costs to be accounted for in the same manner as other costs incurred to fulfill a customer contract (for which ASU 2014-09 provided specific guidance by adding the new ASC Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers).

Based on the feedback received on this proposal, particularly as it relates to the capitalization of molds, tools and dies, the FASB performed additional outreach. Based on its outreach, the FASB decided not to move forward, at that time, with eliminating the preproduction costs guidance. The basis for this decision and the FASB’s views on how this guidance interacts with Subtopic 340-40 are provided in paragraphs BC43-BC45 of ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. In paragraph BC45, the FASB indicates that it does not expect more entities to apply the preproduction costs guidance upon the adoption of Topic 606 and Subtopic 340-40 than applied that guidance before the adoption of Topic 606 and Subtopic 340-40. In other words, if an entity was appropriately not following the preproduction costs guidance before the adoption of Topic 606 and Subtopic 340-40, the entity should not need to start applying that guidance upon the adoption of Topic 606 and Subtopic 340-40.

While the FASB discussed the preproduction costs guidance at its meeting on February 15, 2017, it did not: (a) make any technical decisions, (b) request any additional research be performed before the effective date of the new guidance or (c) add a separate project to its agenda on the topic. However, the board meeting handout discussed by the FASB at this meeting was added to the TRG materials for the TRG’s November 2015 meeting because the FASB believed it provided a good summary of the TRG’s discussions at that meeting as far as how the preproduction costs guidance interacts with ASC 340-40.

The FASB clarified the guidance on recognizing and measuring an impairment loss on deferred costs related to customer contracts as follows: (a) specifying that the contract consideration included in the impairment test should include both the contract consideration the entity expects to receive in the future as well as the contract consideration the entity has already received, but has not yet recognized as revenue and (b) specifying that the impairment test should take into consideration expected contract renewals and extensions with the same customer. The FASB also clarified which assets should be tested for impairment before (e.g., inventory) and after (e.g., property, plant and equipment, goodwill) deferred costs related to customer contracts are tested for impairment.

The FASB clarified that the cost-capitalization guidance in ASC Topic 946-720, Financial Services—Investment Companies – Other Expenses, applies to offering costs incurred by advisors to both public and private funds.

The FASB reinstated (i.e., reversed the prior supersession of) certain guidance on the accrual of advertising costs previously included in ASC Subtopic 340-20, Other Assets and Deferred Costs – Capitalized Advertising Costs, and relocated that guidance to ASC Topic 720, Other Expenses. Under the reinstated and relocated guidance, if the entity becomes obligated to make certain advertising expenditures when it recognizes revenue, but does not satisfy that obligation until after revenue is recognized (e.g., cooperative advertising), an accrual and expense for the obligation to make the advertising expenditures should be recognized when revenue is recognized.

The FASB clarified the level at which the loss contract guidance in ASC Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, should be applied. As clarified, the loss contract guidance should be applied at the combined contract level or the contract level (depending on whether the contract combination criteria in ASC 606-10-25-9 are met). However, the FASB also provided an accounting policy election that allows an entity to apply the loss contract guidance at the performance obligation level. If the accounting policy is elected, it would have to be applied in the same manner to similar contracts.

The FASB revised its principal vs. agent guidance to include the following two key steps: (a) identifying the specified goods or services being provided to the customer and (b) determining whether the entity obtains control of the specified goods or services before transferring control of those goods or services to the customer. Additional information about each of these steps is included in the revised guidance, including better explanation of the supporting role that the principal vs. agent indicators (e.g., primary responsibility for fulfillment, inventory risk) play in determining whether the entity obtains control of the specified goods or services before transferring control of those goods or services to the customer. In addition, the FASB clarified the existing examples and added two examples to better illustrate application of the revised principal vs. agent guidance.

The FASB clarified Example 38, Case B, in Topic 606 to provide a better link between its analysis and the receivables presentation guidance in Topic 606. Prior to the FASB’s clarifications, the analysis for the example may have implied that an entity could not record a receivable before its due date. After the FASB’s clarifications, the analysis clearly illustrates that the entity cannot record a receivable until the customer’s obligation to pay becomes noncancellable.

The FASB removed from the journal entry in Example 40 in Topic 606 the reference to the term contract liability so it would no longer indicate that a refund liability should be characterized as a contract liability.

The FASB provided a third practical expedient related to disclosing the aggregate amount of the transaction price allocated to performance obligations that are wholly or partially unsatisfied at the end of the reporting period (the remaining performance obligations disclosure). Under the new practical expedient, an entity is allowed to not estimate variable consideration for the remaining performance obligations disclosure under the following circumstances:

When the variable consideration is a sales-based or usage-based royalty that is only or predominantly related to the license of IP

When the variable consideration is allocated entirely to a wholly unsatisfied performance obligation, or a wholly unsatisfied distinct promised good or service that is included in a single performance obligation under the series exception in ASC 606-10-25-14(b), because it meets the criteria in ASC 606-10-32-40

Without this new practical expedient, an entity would otherwise be required to estimate variable consideration for disclosure purposes that it would not have had to estimate for revenue recognition purposes.

The FASB also clarified that the pre-existing practical expedient that allows an entity to exclude the remaining performance obligations disclosure when the entity recognizes revenue from the satisfaction of performance obligations in accordance with ASC 606-10-55-18 cannot be applied when the contract consideration is fixed.

The FASB also increased the disclosure requirements when one or more of the practical expedients related to the remaining performance obligations disclosure is elected. These disclosure requirements (as revised) include identifying which practical expedient(s) has been elected and providing additional information about the contract, performance obligations and the variable consideration excluded from the remaining performance obligations disclosure.

The FASB clarified that the requirement to disclose revenue recognized in the current period related to performance obligations satisfied (or partially satisfied) in prior periods applies to all performance obligations and not just those for which there are contract balances.

At the EITF meeting held on July 20, 2017, the SEC Observer made an announcement that the SEC staff would not object to those entities that are public business entities solely because their financial statements or financial information is included in a filing with the SEC pursuant to SEC rules and regulations choosing to adopt the new guidance in accordance with the effective date provided for private companies. Examples of such entities are those whose financial statements or financial information is included in a filing with the SEC pursuant to any of the following:

These entities may choose to adopt the new guidance in accordance with either: (a) the effective date otherwise applicable to public business entities or (b) the effective date applicable to private companies.

The FASB provided an additional practical expedient to the transition guidance in Topic 606 that allows an entity to consider contract modifications in the aggregate (for those that occurred before the initial application date for Topic 606) when determining the following in accordance with Topic 606: (a) the satisfied and unsatisfied performance obligations, (b) the transaction price and (c) the amount of the transaction price that should be allocated to the satisfied and unsatisfied performance obligations.

The FASB clarified the definition of a completed contract for transition purposes to indicate that a completed contract is one for which all (or substantially all) of the revenue was recognized in accordance with legacy U.S. GAAP before the date of initial application of Topic 606.

The FASB provided an option that allows an entity to apply the modified retrospective transition approach to either: (a) all contracts at the date of initial application or (b) only those contracts that are not considered completed contracts (see the previous issue in this table) at the date of initial application.

The FASB clarified that an entity that elects the full retrospective transition approach does not have to disclose the effects of applying Topic 606 on the current period. However, the entity must still disclose the effects of applying Topic 606 on those prior periods that have been retrospectively adjusted.

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